February 2011

Thwarted PotashCorp takeover leaves trail of unanswered questions

Federal government decision reveals lack of legislative direction

By
Paul Brent

The Canadian government's rejection of BHP Billiton’s takeover bid has raised questions among investors and analysts about implications of investing in “strategic resources” like those extracted at PotashCorp's Rocanville Mine | Photo courtesy of PotashCorp

While the Canadian government’s November decision to block BHP Billiton’s bid for PotashCorp could cast a chill on foreign acquisitions in the short term,
the unique set of circumstances around the $39 billion hostile play makes it unlikely to be repeated. “This decision may not have a huge amount of
precedential value because of some significant unique factors,” said Donald Greenfield, a lawyer with Calgary’s Bennett Jones, who held a conference on the
potential fallout of Ottawa’s decision to declare the BHP bid as not of “net benefit” to the country under the Canada Investment Act.

What made the Potash case all but unique, Greenfield argued, was the size of the potential deal, the great importance of the company to Saskatchewan, its
status as a former government-owned entity and current “Canadian champion,” its major impact to federal and provincial tax coffers, a minority government
in Ottawa and a less-than-deft approach by BHP during the bid process.

“This decision deviates from past Investment Canada decisions,” added Greenfield. “There have been several significant foreign takeovers in the last few
years … especially in the mining sector.” The law firm cites successful foreign takeovers of mining giants Alcan, Inco and Falconbridge, among others, as
proof that the country is still open to big M&A deals.

Chris Damas, a Barrie, Ontario-based investment analyst whose firm BCMI Research has long concentrated on the mining industry, said Ottawa was forced to
act because it does not have legislation on its books to handle deals such as the one for PotashCorp. “I think the Minister [of Industry] had to step in
because the CBCA (Canadian Business Corporations Act) is relatively weak in its provisions regarding takeovers relative to some other jurisdictions,” he
explained, adding that Ottawa is currently carrying out a review of foreign investment guidelines in the wake of PotashCorp. “To me, this was a stopgap
measure.”

Damas said that Canadian companies suffer under the CBCA compared with, for example, Delaware-registered companies where “the directors have wide latitude
to evaluate a bid against what they deem in their sole opinion to be the best interests of the corporation” under the so-called “just say no” defense. The
CBCA does not grant such latitude to federal companies in Canada, he noted. “In fact, it was the federal government that just said ‘no.’”

Damas believes that uncertainty from the PotashCorp decision puts a “pall” on foreign investment in Canada. “I assume now that if Cameco was the object of
anyone’s desire or someone like Teck in coal or rare earths, there is certainly going to be more due diligence done before someone makes a foray into
Canada,” he said. “So yes, I was upset about the decision personally. I believe that PotashCorp shareholders could have vetted the offer, had it approved,
and the markets would have uncovered what the true value of the corporation is.”

Ronald Mayers, head of alternative strategies at Laurentian Bank Securities, said, in the end, politics trumped all other considerations. “It was a
terrible decision, and motivated purely by political concerns,” he argued. “Witness all the skating [Industry] Minister Clement has had to engage in since.
But at the end of the day, it will not [stop foreign takeovers]. There is too much money to be made. Plenty of other countries have far more restrictive
regimes.”

Outside Canada, PotashCorp is being looked at as more of an aberration than a sign that developed countries are becoming more intrusive with regards to
foreign acquisitions. “I do think that one-off incidents like this will persist,” said Divya Reddy, an energy and natural resources analyst with
Washington-based Eurasia Group, “even in countries that are very open to foreign investment, like Canada, when the issue of a national champion in a given
sector is at stake. Under this definition, I would include not just traditional state-owned national champions but also private companies that dominate an
industry in a given country. Populist sentiment will be stronger around such companies. “But I don’t think it necessarily represents a trend toward such
intervention in M&A more broadly,” she concluded.